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Return of Premium Term Life Insurance Makes For Sound Investing

By Mike Heuer

See also Convertible and return of premium can secure retirements.

There are many advantages to term life plans, and the lower cost is right at the top. Compared to the cost of whole life policies, the cost is less than 10 times what might be necessary for permanent life insurance. But term life plans also can come with return of premium options, which can result in a large return if the named insured outlives the policy term.

For example, a $1 million policy might cost about $10,000 annually for a 30-year term. And if the named insured outlives that 30-year period, a lump-sum return of premium life insurance could result in a $300,000 payout after deducting fees and maintenance costs over the life of the contract. And that makes for a nice investment for retirement years while at the same time providing a high level of life insurance protection.

Most insurers offer such plans for 20- to 30-year periods with coverage amounts usually starting at $100,000. Such plans are best used for ensuring a home mortgage, college tuition or home equity loan are protected against the possibility of a family’s primary bread-winner dying suddenly and leaving financial obligations. Premiums are level, meaning they never change during the period for which insurance is in force.

Some insurers offer types that can build cash value against which loans can be drawn, and others might offer policies in which all premiums are returned minus fees and maintenance costs. That means nearly every dollar put into the policy is returned.

Such plans can work well in the event of a divorce. Sometimes during divorce proceedings, one party will be required to purchase life insurance protection to ensure the former spouse and any dependents do not suffer a sudden drop in income due to a loss of alimony or other court-ordered payments if the primary earner should die. In such cases, returning premiums makes the most sense for the individual required to buy the insurance protection.

One of the best aspects of getting the rates paid on the policies returned is the fact the proceeds are tax-free. That means a tidy sum can be paid to the policyholder if the named insured outlives the term, making for sound retirement investing. And because some plans actually grow cash value, they can provide a nice return on the investment.

Studies show such policies can provide investment returns of between 2.5 percent and 9 percent. And when the investment growth is returned with a tax-free status due to the proceeds being considered a return of expenses rather than investment growth. Some policies also offer prorated returns of payments made during the latter stages of the policies in order to give earlier returns.

There are many ways to buy quality term policies that can result in greater investment potential for policyholders. And the return of payments made each month can be one of the best. Policyholders can protect the incomes of their families while at the same time ensuring a substantial sum will be available tax-free if the policy expires with no death benefit paid.